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Chapter 3

Taking the Leap

A few weeks after our all-night session about starting this new business, I found myself in Sitka, Alaska, sitting at the Shee Atika Lodge. I was still working for the tire company who hired me out of college. This Sitka trip was to meet with and present a proposal to Alaska Lumber and Pulp, a very large pulp mill. I had called this company for years, but had not yet done any business with them. They had hundreds of “rolling stock,” meaning equipment using large industrial tires. I traveled with Bill VanSomeron, the West Coast Manager for Michelin, along with our Michelin sales representative, Norm Toomey. Both were great people to work with, and fun to be around. We had all been collaborating on a proposal for this pulp mill.

That day, during the meetings, we succeeded in getting all the business. Later that evening, we were celebrating in the bar. The bartender came to the table, asking if there was a Mr. Lorenz there who could take a call at the bar.3 It took a moment to realize that the Mr. Lorenz she was referring to was me! At the ripe, young age of 26, the only man I’d heard called Mr. Lorenz was my father. Curious, I picked up the phone at the bar, wondering who might be on the other end and hoping my wife and the kids were all okay at home.

“I found a retread plant that will work for us! I just booked a flight to Kansas City to look at the equipment. It leaves tonight at midnight; red eye.” John’s familiar voice rang out on the other side of the phone. It turns out there was a complete retread manufacturing plant in a bankruptcy sale, and it was well below what we had budgeted. It seemed like the perfect scenario.

“If we buy it, you will need to resign from your job next week. Are we still good on our plans to start the company, Kim?”

Pausing for half a second to get a grip on the fact that this was becoming a reality, I made my reply. “John, we shook hands on a deal—at 4:30 AM, nonetheless. I am committed. Let me know as soon as you find out how this goes with the equipment acquisition.”

Needless to say, a lot was going through my mind as I made my way back to the table where the Michelin guys were seated. I had a new company car, a new beautiful office in Seattle, and I had just landed another promotion. Making the choice to walk away from all of that without knowing how the future might unfold would be a very bold move, to say the least. My wife and I had just barely moved into a new home, not to mention having two children who were only two and four years old. Reality started setting in, and my thoughts raced a million miles an hour as I prepared to break the news to the table. All the initial and very primitive plans we had discussed about starting this new business involved having a Michelin dealership agreement in place. At that time, only the large, well-established companies had dealership agreements with Michelin. Having the Michelin dealership was something I felt had to be in place for John and me to succeed.

I sat down, took a drink from my glass, and looked Bill and Norm straight in the eyes.

“Gentlemen, I am planning on leaving the company and starting my own tire company.” I took a deep breath, expecting the worst. After all, what company like Michelin would want to take on some small fledgling new company with no credit, no assets, and no customers? Their reaction nearly made me fall out of my chair. Bill, the head of all the West Coast, slammed his fist on the table and shouted, “Damn, Kim, this is the best news I have heard all year! It’s about time you realized it was time to leave this company and start your own tire business!”

Not skipping a beat, I launched into my next order of business.

“Well, Bill, we need to have Michelin to make this work. What are the chances we could have a dealership?”

“I do not care what it takes on our end. You’ve proven that you’re a smart kid and you know what you’re doing. Congratulations, you’re going to be a Michelin dealer! One way or another, I will make this work!”

Before I could even thank him (or pick my jaw up off the floor), he continued, “Kim, this is fantastic news. Whatever it takes, we are going to make this happen together!”

I didn’t sleep much that night, reeling with excitement and anticipation. I had a long trip home the next day, and I had to sit down with my wife as soon as I got home. While the Michelin deal far exceeded my wildest expectations, there was still so much at stake. Since the initial conversation with John, I had talked to my wife often about the possibility of leaving to start a new company. We had spoken candidly about the risks involved, and she was incredibly supportive. I remembered our last conversation, where she encouraged me as only a wife can.

“I trust you, Kim. I think you should do it. How will you ever know if you can succeed if you don’t take the risk? Besides, you made a commitment to John, and he has already quit his job. We can’t let him down,” she had said, instantly putting my fears at ease and reminding me of the truth. I was thankful to have a spouse who was willing to take the plunge and trusted me. When starting up a company, communication is tremendously important, especially with a spouse or significant other.

But now, as I lay wide awake before going home, doubts started to creep back in and threatened to take over. Once again, I was pulled back to reality—you know, the “what if we fail” reality. Anyone starting something with this much risk really needs to think through the alternatives and worst-case scenarios. Jill, my wife, is very sharp. We met at college. She had her own career before we started having children. I was fortunate to have excelled at work so she could stay home and raise the children. Being a mother at home is far more difficult work than having a normal job. We were both glad we could do it, and she had the will. She always gave excellent advice. She also knew of my concerns about the current company I worked for possibly failing.

After I had gotten the final green light from my wife, John and I headed to the bank. We met with a trusted banker that John had worked with named Andy Clark. We laid out what we expected we would need and what we would bring to the table. Our banking plans were to put a second mortgage on each of our homes and borrow additional funds secured by the retread plant equipment as well as other equipment. Then we would ask for receivable financing to cover the lag from collection on sales and due dates from suppliers. Andy listened carefully, asking some valuable questions along the way. I slumped down in my seat a bit, not able to read into how Andy was feeling about the risk involved with the bank taking on a fledgling unproven new startup. Though it was not immediately clear, Andy was sizing us up. He not only cared about the numbers, but he was looking at our character, knowledge, and track records. He wanted to know as much as he could before he made a decision.

Finally, Andy told us he thought he could secure financing for the equipment, as well as a credit line for running the business. He let us know that both John and I would have to take out the second mortgages on our homes as discussed. This might seem like a normal thing to you now, but let me share with you that interest rates were 17% (and still on the rise) at that time as compared to the 3% and 4% rates of more recent times! Those high rates are unheard of today, but that was the reality in the late ‘70s. It was incredibly expensive to finance any business (or home, car, or anything that required credit), and most people thought it was crazy to start up a business in that sort of credit environment.

Around this time, I remember reading a biography on the founder of the world’s largest privately-held commercial tire company, Brad Regan Inc. In the book, Mr. Regan says, “It would be easier to start a new tire business today than when I did it.” Though I never forgot that statement, I always had doubts that it was true. Was it possible that, even with interest rates sky-high, it was easier to start our business now than if we had decided to start it ten years before? Brad Regan had started his company 30 years earlier. What could he know about starting again now?

As I would come to find out, it was true, and still is true today. There are still so many opportunities, and as stated so many times already, they are in front of all of us, just often not seen. With today’s technological advancements, much of running a business is easier than it was then.

Little did we know this fledgling new enterprise John and I had visualized would one day surpass the market share and sales of what was once the largest privately owned multimillion-dollar tire operation of its time. However, this success did not happen easily. We had our fair share of humongous brick walls ahead to conquer and hardships to prevail through.

When considering any new business, especially one with high cash needs for equipment and labor, it pays to understand what risks can be involved. More importantly, it pays to understand how to deal with those risks. In business school, you read many case studies of mergers and acquisitions; of huge corporate decisions that either worked well or failed. You study accounting, profit, and loss. But rarely could any school touch the reality of those of us who simply started a business from nothing and explain both the good and bad consequences.

Remember when we laid out our original profit and loss pro-forma statements? The ones we completed at 4:00 AM after working through the night? Those statements had forecast first-year sales at $700,000 while showing a small profit. Though many business schools spend time teaching cash flow—the life and death of any business—the schools often fail to show the difference between a profit and positive cash flow. “Cash flow” is simply the amount of money you have coming in compared to the amount needed to pay bills. The majority of business purchases and sales are on credit. The inventory we have to pay for is due to be paid before we have sold it and collected the money, which creates a negative cash flow when growing. While on paper, the new company could predict a profit, the pro-forma numbers can rarely predict cash flow adequately. Cash flow has many determining factors, such as inventory management, financing terms, and so much more. Many profitable companies fail for lack of cash flow, which makes them unable to pay their debts on time. Cash is the lifeblood of growth, and it is of utmost importance to understand.

As it happened, our first-year sales exceeded $1,450,000—over double our plans! The second year we forecast $1.8 million, and sales came in at $2.2 million. With third-year sales exceeding $3.3 million, we were growing at 50% annually, far exceeding what our cash flow generated and causing greater borrowing and dependency on the bank. Though we never had a negative profit year, the profit was still not enough to keep up with cash needs, increased inventories, and increases in account receivables.

We were heading for trouble at this growth rate in such a competitive, commodity-like business.

3 Note: This was prior to the use of cell phones.